What's next from banks? Prepaid cards

Faced with a rule that will make debit cards much less profitable for them, banks will steer us to other types of plastic that make them more money.

By Karen Datko Mar 10, 2011 5:30PM

Look for a new product from your bank in the coming months: They're very interested in prepaid cards, which they've pretty much ignored until now.


There's a profit motive behind this plan: New federal rules will limit the interchange fees banks charge merchants every time you swipe your debit card to 12 cents. The current average is said to be 44 cents, or a total of $16 billion in annual revenue for banks. However, that "swipe" fee limit won't apply when you use a credit card or a prepaid card.   Post continues after video.

(Banks are fighting tooth and nail to have the limit on debit card swipe fees delayed or killed before it can take effect in July.)


The question is: Would you be willing to trade your debit card for a prepaid card, or use both? Why would you want to? Americans love their debit cards, which surpassed credit cards as our favorite form of plastic a couple years ago.

Well, banks are considering other changes to make debit cards less attractive to users.

  • The New York Post reported that some big banks may set a limit on the size of debit card purchases, forcing you to reach for your credit card.
  • Banks are considering charging consumers a fee for using debit cards.
  • Debit card rewards are being downsized or eliminated.  

See a pattern here? 


Prepaid cards are commonly available now from nonbank sources, and you can buy them in convenience stores. However, The Wall Street Journal reported late last year:

"Banks are realizing that they have ignored this prepaid product and left it to the nonbanks," said Gwenn Bézard, co-founder and research director of Aite Group, a consulting firm that specializes in the banking industry. "They want that business back."

For some, this is actually a good idea. A new study shows that using a prepaid card with modest fees is cheaper than what a checking account costs these days. That could provide access to basic bank services for people who can't afford the fees on checking accounts.

Here's what's in store from some of the major banks:

  • Capital One already offers a prepaid card, with no monthly fee as long as you load $500 on it.
  • Wells Fargo has been testing prepaid card in some markets, The Wall Street Journal says.
  • Chase is testing a monthly fee for debit cards.
  • U.S. Bank no longer offers debit card rewards to new customers and is looking into prepaid cards.
  • So is Bank of America, which is also testing several new fees for checking accounts.
  • PNC Bank will roll out a prepaid card in June. On a bright note, PNC is not eliminating free checking for the 70% of its customers who have those accounts, The Wall Street Journal reports

How do you pick a prepaid card if you're faced with that choice? The Reuters Prism Money blog by Linda Stern has some suggestions:

  • Pick one with online bill pay and, we might add, make sure that service is free.
  • Get one that's FDIC-backed and also limits your liability if your card  is lost or stolen. That's a given with debit cards, but not with all prepaid cards.
  • Check out all the fees, including ATM access fees, monthly maintenance fees and cancellation fees. They can be excessive.

Or there's another choice. Washington Post personal-finance columnist Michelle Singletary, who wrote about the swipe fee fight between merchants and banks, suggested:

I have a wild and wacky idea. What if we just went back to using cash? Better yet, let's all begin to negotiate more for lower prices on our purchases if we pay in cash.

Or maybe the discussion over debit cards and prepaid cards will soon be moot. "Many mobile banking solutions are coming down the pike, so the phone-based account may replace the piece of plastic before you know it." Stern wrote.


Does a prepaid card sound attractive to you, or do you prefer to use a debit card, credit card or cash? And isn't monitoring this stuff kind of like watching a ping pong game? After a while you feel dizzy.


More from MSN Money:


Apr 2, 2011 8:44PM
BB&T has already come out with a prepaid account. The BB&T MoneyAccount.


Includes all normal account features. Bill pay, free BB&T ATM usage,  Free cash deposits, Direct deposit, mobile banking  etc etc

There should be dozens and dozens of this type of account from banks in the near future. Free cash deposits and teller transactions are a big advantage over normal prepaid cards which charge from $2 to $5 just to add money to the card without direct deposit.
Mar 11, 2011 3:43AM
Good article with useful links. Full disclosure: my company Plastyc is one of the "nonbank" service providers mentioned as having taken the lead in offering prepaid cards.
I expect large banks to make the same mistake as large airlines when they tried to imitate the low-cast carriers like SouthWest, JetBlue or Virgin America. Banks will most likely botch their attempt to catch up, if they just add a prepaid product without putting to good use the gains in efficiency inherent to prepaid.
The low-cost version of the big airlines were just "cheap" in the worse sense of the term.

Prepaid cards sold at retail locations are probably not a good indicator of what a prepaid offering from a bank should be: cards grabbed from j-hooks have very limited features and short life times.

Prepaid services with the right combination of budgeting tools, rewards, and mobile access should be the model for next generation banking services.

Mar 10, 2011 10:09PM
What if you use the debit as a credit? Does the limit still apply?
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